HMRC reinstated as preferred creditor in insolvencies

Nestled between the jokes and vacillations of a rather fluffy Budget speech, the Chancellor reinstated HMRC as the preferred creditor in business insolvencies.

It reverses a 2002 change to the insolvency regime where HMRC was demoted from its perch as preferential creditor and was ranked alongside other unsecured creditors. Currently, many creditors other than HMRC have a higher priority claim on the assets of an insolvent company – even for taxes paid by employees and customers that the business holds temporarily before passing them onto the government.

From April 2020 however, HMRC will have greater priority to recover taxes paid by employees and customers. According to the government, this will ensure that an extra £185m in taxes already paid each year reaches the tax authority.

However, the change comes with its critics. In a statement, Emma Lovell, chief executive of insolvency trade body R3, called the change potentially “retrograde” and “damaging”.

“It will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002. It may also make borrowing for small businesses harder to come by.”

Dan Booth, a director at Leonard Curtis, echoed Lovell’s concerns around borrowing. “The likely effects of it will be to increase the cost of borrowing and the amounts lent. So potential lenders will be looking for more fixed charge security, which could make matters worse. With businesses already under pressure this only brings additional risk for all stakeholders.”

Booth added that the move is good news for HMRC -- but maybe only in the short term. “The other effect of it is that the HMRC could become more aggressive with enforcement given their renewed status. For the existing business owner and would be entrepreneurs looking for encouragement in a post-Brexit environment it’s not a clever move in my view.”

Instead of this change, R3’s Lovell said HMRC could do more to engage in insolvency procedures at an earlier stage. “HMRC has a wide-ranging toolkit to help it to tackle abuse and evasion which could be used more fully, instead of forcing its way to the top of the queue by legislation.

“HMRC considers itself to be an ‘involuntary creditor’ of businesses because it cannot choose which companies to engage with. However, all suppliers to businesses are ‘involuntary creditors’ and have to take commercial risks, and this announcement will hugely increase the risks taken by small enterprises trying to do business.”

HMRC’s reinstatement as the preferred creditor will also worry small firms. Carillion’s spectacular collapse, for instance, saw a reported 30,000 small firms owed money. The tax authority’s preeminence in insolvency matters will push firms like these further down the pecking order.

And from a look at the latest stats, insolvencies aren’t slowing down. In fact, they’re increasing: underlying corporate insolvencies rose by 9% in Q3 compared to Q2 2018, and rose by 19% compared to Q3 2017, according to R3.

It’s the first time there have been more than 4,000 corporate insolvencies in one quarter since the start of 2014. Generally speaking, 2018 has been a tough year for English and Welsh businesses, with insolvency numbers equal to or much higher in every quarter than in the same period last year.

“The key causes of insolvencies seen by the insolvency profession are familiar. Rates problems, particularly for retailers, are frequently mentioned, and the Chancellor’s rates-relief announcements in the Budget have come too late for some,” said Duncan Swift, R3’s vice-president.

“It’s worth noting that high profile insolvencies can have a knock-on effect for others, too. For every struggling retailer unable to pay its debts, there will be numerous suppliers as well as shop-fitting or delivery firms who come under pressure, while there have been well-publicised troubles in sectors like construction, too.”

Please can you clarify what you mean by 'many creditors other than HMRC have a higher priority claim on the assets of an insolvent company'?

Excluding secured creditors, the only creditors higher than the unsecured creditors are the preferential creditor (The Insolvency Service) and any floating chargeholder. Unsecured creditors also sometimes get a bite of the floating charge cherry via the Prescribed Part.

If this change is put in place it's going to harm the Floating Charegholder - i.e the Banks.